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5/23/2010
Rep. Montgomery: A closer look at the Small Business Health Care Tax Credit
Last week, state legislators were briefed by staff from the newly-created Wisconsin Office of Healthcare Reform on the state’s plan to implement the new federal health care reform law. The briefing primarily focused on the law’s near-term impacts and in particular there was considerable discussion of the one provision in the new law that is already in effect – the small business health care tax credit. As we learn more about this new tax benefit, it appears that the tax relief may not be as beneficial. Please allow me to explain.
Beginning in 2010, small businesses with less than 25 full-time employees that pay average annual wages below $50,000 and cover at least 50% of the costs of health care coverage for their workers are eligible for a federal health care tax credit of up to 35% of a small businesses health insurance premium costs. According to the Office of Healthcare Reform, approximately 90,000 Wisconsin small businesses meet the first eligibility requirement, less than 25 full-time employees, but of those, the number that will qualify for the tax credit and the amount of the tax credit the qualifying businesses will receive is much more complicated.
Tax code provisions are rarely straightforward and the devil is often in the details. The federal small business health care tax credit is no exception. In this case, the maximum tax credit of 35% is available to businesses with fewer than 10 employees that pay average annual wages of $25,000. From there, the amount of credit goes down significantly for businesses that have more than 10 employees who are paid more than $25,000 annually. The tax code term for this is called a “phase-out.”
To illustrate how this “phase-out” works, let me share with you two examples featured in a recent media story. A Utah small business with 11 full-time employees paid an average wage of $26,100 will receive a tax credit of approximately $21,000 on health care premium costs of nearly $68,000 annually. By contrast, an Illinois business with 24 employees who are paid an annual average wage of $35,000 will not be eligible for any federal small business health care tax credit.
Not surprisingly, President Obama and the members of Congress who voted in favor of federal health care reform do not talk much about the “phase-out” aspects of the health care tax credit. If you want to fund out about whether the company you own or work for is in line for this new federal tax benefit, you can go to this website put together by the National Federation of Independent Businesses.
Rep. Montgomery is a Republican and represents the residents of the 4th Assembly District (Green Bay). Montgomery, first elected to the Assembly in 1998, has chosen not to run for reelection in 2010.
COMMENTS
Very helpful. Thank you. Question. Is there an offset of the tax credit against deductible insurance expense? For example if the employer contribution is $3000 per year per employee and that is (typically) a deductible expense and if the marginal tax rate (assume a flow through entity) is 35%. Is the K-1 recipient able to deduct the $3000 cost and get the credit? Or is the $3000 expense offset by the credit?
dave allen (Wed May 26 11:07:42 2010)
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